CDNow: Now Is the Time

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CDNow: Now Is the Time

CDNow completed its US$522 million acquisition of N2K on Wednesday. Now all the company has to do is cut spending, turn a profit, and make its name synonymous with music.

The combined company, to be known as CDNow, is the largest online music seller and the third-largest online retailer, based on revenues.

But while other Internet stocks have shown unstoppable gains in the recent past, CDNow (CDNW) and N2K have languished.

Some investors question how CDNow will compete with leading online retailer Amazon.com and its 6.2 million customer base. They ask how a firm can survive as a specialty music seller while Internet companies like Amazon become virtual discount department stores.

CDNow chief executive Jason Olim likens CDNow to a Tower Records or HMV while he compares Amazon to a Wal-Mart or Kmart. He expects investors to eventually draw the same conclusion.

"We are somewhat of a sleeper," said Olim, 29, who created CDNow in 1994 in his parents' basement. "Investors don't understand our story today. I have faith they will understand it soon."

Wall Street has linked CDNow's problems with Amazon.com's successes. Amazon did not even begin selling CDs until last June. But it was a household name, and it took only six months to outpace CDNow and become the No. 1 music seller on the Web.

In contrast to CDNow, Amazon does not have to shovel out millions of dollars for shop space on high-rent Internet sites. The Seattle company sells most of its wares straight from its spot on the Web.

But the combined CDNow will have a bigger bargaining chip as it negotiates leases with Internet heavyweights like America Online, Yahoo, and Excite. With its newfound clout, CDNow can outmaneuver Amazon and every other online and bricks-and-mortar competitor, chairman Jon Diamond said. At the same time it can be a better music store.

"You have one company that will be the music brand on the Internet," said Diamond, N2K's chief executive and a saxophonist who toured with Kool & The Gang and the Four Tops.

CDNow hopes to expand its product line, while sticking to core music-related products. It will launch a new site in May that combines the lush rock-and-roll look of N2K with CDNow's sparse, efficient image.

Caging the Amazon brand is key to CDNow's success, said Kevin Wagner, an analyst with Adams Harkness.

"This whole e-tailing game is all about brand names and how you contain the 600-pound gorilla that got into that space," Wagner said. "The Amazon issue is still a psychological issue on the stock."

Olim said Amazon is nothing to be afraid of.

"People point to Amazon as the company that seems to be able to put anyone out of business, but they haven't put anyone out of business that I know of," he said.

CDNow's stock closed at $18.44 on Wednesday, up 63 cents but down more than 50 percent from a 52-week high of $39.25, reached in April 1998.